Our top picks this week come from portfolio manager Doug Cannon of Texas First Investment Managment Company. Texas First specializes in Texas-based companies across a wide variety of industries. Here are some of their current picks, despite the current market climate:

1. Southwest Airlines (LUV)- “It traditionally has been the most efficient, most profitable airline in the country and we bought that earlier this year seeing a turnaround in the airline stocks and believing that there was a likelihood that the price of oil would go down and that profitability will improve. We bought Southwest Airlines earlier this year at about $12.25; it’s now at$15.60 so we’re up about 27% there.”

   
   

2. SYSCO (SYY)- “[They are] the world’s top wholesaler of foods. It’s not an exciting business, but it’s something they do better than anyone else. Sysco is really a growth company that’s been selling at a value price. It’s not something that’s going to move overnight, but the company is going to continue to be profitable, regardless of the economic environment, and over time the stock should make some good gains.”
   
   
3. Tenet Healthcare Corporation (THC)- “Tenet, based in Dallas, operates hospitals, and they have a good reputation for turning hospital operations around. We bought that at just a little over $5 about a year ago and it’s up about 24% this year. We think it is a very good long-term holding. Tenet’s a good case of a company that had troubles in the past, but where the stock price just got too low. It had operational problems about two years ago, and because the stock was so cheap, we watched the company carefully.Once we saw things start to turn around, we thought it was a good time to buy. We still think that it’s got some very good potential.”

For the complete interview with Mr. Cannon, click here.

For our complete Investing Strategies report, including interview with a variety of portfolio managers giving their investment philosophy and stock picks, click here.

JDS Uniphase JDSU (NASDAQ), the laser and optical fiber component maker, announced during a conference call on October 29th its CEO, Kevin Kennedy, will be resigning his position.  Kennedy is leaving JDS Uniphase after five years at the helm of the firm to become the new CEO of private communications firm Avaya, Inc. in January 2009.  Kennedy’s announced resignation comes as JDS continues to face slowing profits and a prediction by the firm that its sales for the second quarter that end in December are expected to be well below analysts forecasts.  Kennedy leaves the firm according to a story in Fierce Telecom,

… as JDSU is planning to cut 400 employee and contractor positions, as well as reduce its number of manufacturing locations from 19 to 12.   

 Kennedy’s exit also comes as the company stock, according to a story by Bert Hill of the Ottawa Citizen,

plunged 61 per cent in the last year.   

 It is difficult to determine what Kennedy succeeded in doing for JDS over the last year.  Kennedy himself was quoted saying (read Lightwave article),

“My decision to leave JDSU reflects the convergence of a unique opportunity presenting itself as well as my confidence in the JDSU leadership team that is in place to execute the initiatives now underway which should result in best in class operating metrics,” Kennedy was quoted as saying in an announcement. “I look forward to continuing to work with the team as a member of the board of directors.”     

 JDS finds itself in a difficult situation. Keep a very close eye on who the board puts in charge and who it ultimately finds to replace Kennedy.  It is hard to determine whether he is leaving a sinking ship or just jumping ship for a far better opportunity.Time will tell.For more: Giga Om Barron’s Tech Trader (2007)Marketwatch  Portfolio.com

With a $700 billion bailout on the way, people are wondering what effect this bailout will have on various parts of the market.

Going back to our special focus this week on Residential Construction, we spoke with analyst Ken Leon of Standard & Poor’s U.S. Equity Research about how the bailout will effect  homebuilders:

“We think the federal bailout will help, number one, buyers’ confidence. Number two is the ability to reduce sizable inventory of existing and new homes in the market. The average is typically five to six months of total home inventory. We are about 10 months right now, which is still quite high but is beginning to come down each month. Number three, homebuilders, which are roughly one out of every seven or eight housing transactions, are pretty much on the sidelines. They have reduced most of their speculative building of homes, and they have significantly written off lots of inventory for improvement and land option contracts. The top 13 public homebuilders have written off, since the beginning of 2006, $25.6 billion through August 30, 2008.”

For the complete Residential Construction report, including full interviews with Mr. Leon and other analysts giving a complete overview of this space, click here.

MF Global Ltd. MF (NYSE), the futures and options brokerage firm, announced today that CEO Kevin Davis resigned from his position as CEO and board member effective immediately.  Davis had been with the firm for seventeen years.   Back in February of this year the company made public a rogue trading scandal within the company.  According to a story by Stephanie Baum of Dow Jones’ Financial News dated February 28, 2008,

Evan Dooley, who worked at the Memphis branch office (MF Global) in the US, was discovered working in wheat futures via the Chicago Board of Trade at a level that “substantially exceeded his authorized trading limit.” MF Global terminated Dooley shortly after the discovery.  

The company’s share price fell 27.6% at the close of trade to $21.19 on Thursday. Its share price fell a further 19.7% on Friday to $17 as of 1:54 pm EST. When the company went public this past July, its opening share price was $31. 

In addition, Standard & Poor’s Rating Services and Moody’s Investors Service cut the broker’s credit rating on Friday. S&P lowered its long-term counterparty credit rating to BBB from BBB+. Moody’s lowered its long-term credit rating to Baa1 from A3. 

From that point onward the company has been struggling.  According to a story by Kevin Kingsbury in the Wall Street Journal,

Shares of MF Global have lost 93% of their value this year, including 48% this month alone, following a rogue trading scandal that wiped out the prior year’s earnings, raised concerns about its risk-management policies and triggered a dilutive refinancing with private equity firm J.C. Flowers & Co. LLC in May. 

With the announcement of Davis’ resignation the company appointed current president and chief operating officer Bernard Dan as his replacement.  Dan joined the firm back in June.  Prior to his appointment, Dan had led the Chicago Board of Trade (CBOT).  Last year the CBOT was acquired by the CME Group Inc.  Dan was the CBOT’s president and CEO for close to five years prior to the acquisition.    Dan has come in to stabilize the firm.  We will just have to wait and see how the changes play out and exactly what Dan can do to turn the firm around.  It will be a tough road.  For more: Forbes  Marketwatch  Reuters  Seeking Alpha (June 2008)   Financial Times

With the economy in turmoil, people from the highest level of government to the man on the street are trying to figure out how exactly we got where we are, and why we didn’t see it coming.

However, if we look back a little more than a year ago- before the collapse of the big banks, before the big government bailout- TWST interviewed one person who did.

TWST spoke in November 2007 with portfolio manager Thomas Au of R.W. Wentworth and Co. about his predictions for 2008:

“I had been calling for a correction in the markets in the last three years. We’ve been talking, but have been early, except recently with regard to financials. The reason I was early is because there had not been a trigger event. Three years ago, I did not understand the importance of the trigger events to the extent that I do today.

There is now a trigger event: that’s the collapse of the subprime bubble and the fact that the so-called low-doc, nothing-down mortgage is the modern version of the 10% margin on stocks that was prevalent in the 1920s and brought about the 1929 crash. The low-doc subprime mortgages are coming home to roost as we speak, just as the 10% margin on stocks came home to roost in the 1920s. That’s why the market is in far greater danger today than it was prior to the collapse of the subprime bubble.

When I’m talking about the potential for a market pullback, it’s not the usual 10% to 20%. I’m talking about an order of magnitude adjustment which would be on the order of 50%.”

TWST recently interviewed Mr. Au about his review of 2008 and his outlook for 2009. The interview will run in an upcoming issue of TWST. Watch this space for excerpts.

For now take a look at this week’s Investing Strategies Report for interviews with other portfolio managers, giving their current stock picks, and outlook for the future.

This week’s focus in TWST is on Residential Construction. This is obviously one of the more hard hit areas of the current financial crisis, and we spoke to several analysts of the state of this space- where we are and where we’re headed.

According to Robert Stevenson of Fox-Pitt Kelton Cocrach Caronia Waller, there will be more of a drop in this space, the only question is how much. This question is dependent on the job situation:

Mr. Stevenson: I think that everything at this point revolves around the jobs. If you think that the economy is just going to muddle along at this rate for a while, I think that home prices probably have another 10% to 15% on average to drop in order to reach the sort of bottom. But if you believe that the economy is about to nosedive, that the job losses are going to start accelerating from here, expect a bigger price drop (more like 20% to 25%). Whether it’s the house that you live in or the homebuilder stock that you own, there is a lot of cause for concern.

As for the homebuilding companies themselves, Stevenson claims that while this current crises has weakened them, it hasn’t crippled them:

“If you take a look at the debt maturity schedule from most of these companies, it’s not all that onerous for them in a lot of cases. So with no near-term debt maturities, as they stop buying land they start throwing off cash, which has allowed them to pay down some of the debt as it comes due. While many of these public builders are weakened from a balance sheet perspective, it hasn’t killed them.”

At the same time, he’s concerned about further fundamental shifts in this space:

“I’m not sure that there are that many of them that have the balance sheets that would be able to really withstand another severe drop in fundamentals from here.”

For the complete Residential Construction report, including further insight into this space and stock picks in this turbulent time, click here. 

Speculation is beginning to arise about the fate of Rick Wagoner as GM’s CEO should a deal be made with Chrysler/Cerberus.  While the chances for a deal between the two car companies still seem a bit remote, should it happen, would Wagoner remain CEO?  I would doubt it.   Earlier today a piece in Bloggingstocks.com speculated on a number of possible choices who would come from Cerberus.  While I am skeptical of the choices listed, I do think a deal would necessitate the need for a new CEO excluding both Wagoner of GM and Nardelli of Chrysler. Stay tuned.

Our other special focus this week is on Internet Infrastructure. We spoke with analyst Rodney Ratliff of Stanford Group Company about his top picks in this space during this turbulent time for the markets:

1. Akamai Technologies (AKAM)- “ My favorite stock right now, the one I picked for our monthly focus list, is Akamai. You are talking about a company that is generating ridiculous amounts of free cash flow. In the most recent quarter, Akamai generated $70 million in cash flow from operations. In terms of free cash flow, in fiscal year 2008, I am projecting that they are going to generate about $158 million in free cash flow…So in terms of self-funded status and the ability to weather even a prolonged downturn, I think we are looking at a winner here, especially considering the stock’s trading now near a five-year low.”
2. Equinix (EQIX)- “The appeal there is simple. Content has gotten so dense, and so bandwidth intense, and is only going to get more so…Equinix can provide for customers a data center with a massive footprint that features the availability of 250 or so network providers in any given individual data center, 24/7 support and very effective ventilation and air conditioning to keep equipment running optimally. The biggest appeal is the availability of a wide selection of networks providers, which enable the client to bid network providers against each other which improves cost of operation. So it comes down to build versus buy.”

For the complete internet infrastructure report, including the full interview with Mr. Ratliff, and other analysts giving a fuller picture of investment opportunities in this space, click here.

Cadence Design Systems CDNS (NASDAQ), which had a major CEO change earlier in the month (see post), according to CFO.com announced it,

is restating its financial restatements for the first two quarters of 2008 to correct $24 million in revenue recognition errors. It is also reviewing how customer contracts signed during the first quarter were recognized instead over the duration of the contracts, beginning with the second quarter.  

The announcement could not come at a more difficult time.  With a new CEO in charge along with other key managers the company must now focus on this issue.  According to the CFO.com article,

Cadence is hardly the only software maker to get snagged by revenue recognition issues. And although it seems too early to say if there’s any relation between the current company issues and broader industry problems, software makers have been struggling with the accounting rules for years over the booking of sales.  

Keep a close eye on when the company manages to put out its stalled third quarter earnings and how it deals with this latest difficulty. 

For sometime I have been considering including Sun Microsystems’ SUN (NASDAQ) CEO, Jonathan Schwartz, on my CEO Watch list.  Schwartz was appointed CEO back in 2006.  While I have long admired his intelligence and creative thinking the company’s overall performance under his tutelage has not faired all that well.  For a long time, I thought he would ultimately find a path to success for the firm.  Recent events, however, have forced me to include Schwartz on my CEO Watch list.   First there was the company’s latest performance results.  According to Therese Poletti of MarketWatch,

On Tuesday, the systems and software maker gave Wall Street a nasty surprise with the news that it expects to report a worse-than-expected loss in the fiscal first quarter. It is also conducting an internal “impairment analysis” because some its business units may be now worth less than their carrying value.   

 Poletti went on in the article to say,

It is time for Schwartz to make some serious changes at the beleaguered company, or it is going to continue in its downward spiral, in the same manner as ghosts from tech’s past, such as Digital Equipment Corp.   

Second, the company’s troubled performance has been seriously complicated by its largest shareholder, O. Mason Hawkins the CEO of Southeastern Asset Management.  Southeastern Asset yesterday disclosed it holds just over 21% stake in Sun. Hawkins has begun to squeeze the vise around Schwartz.  Hawkins is pushing hard for Sun to make changes to increase shareholder value.  They recently shifted their SEC filing from a 13G to 13D.  The change indicates Southeastern will no longer sit by passively but will continue to pressure management for changes.The proverbial third shoe fell today.  The co-founder of the firm, Andy Bechtelsheim, who returned to the firm four years ago, announced today he would be leaving Sun.  According to a story in Business Week,

(He will leave Sun) to become chairman and chief development officer at Arista Networks, a startup he has funded that sells a powerful network switch for data centers, and whose customer list includes Google (GOOG). Arista’s CEO is Jayshree Ullal, who left Cisco Systems (CSCO) in May after 15 years at the company, and who had worked on some of the company’s key products.   

The departure of Sun’s star engineer, who had spearheaded development of a new line of more affordable products the company is pushing, comes as Sun’s sales slump and investors grow impatient with the company’s turnaround plans.

Numerous analysts are predicting a possible sale of the company or parts or a management change.  The problems facing Sun at this point in time make it likely that Schwartz may find himself out of his CEO position if he can not found a solution to the company’s ongoing difficulties. Stay tuned. For more:Deal Journal Forbes  TheStreet.com  BloggingStocks.com  CRN